Last weekend, I attended a house party with a lot of other people from the Balkans and as is often the case, the conversation turned to European politics. One of the attendants from Serbia recalled a common saying from decades ago that is gaining popularity again: "Duzan kao Grcka." It means "in debt like Greece." By recalling the saying, he made an interesting point: was the Greek debt crisis really that difficult to figure out?
Granted, holding this viewpoint requires accepting some stereotypes, but it appears the stereotypes fit. The rest of the economically troubled countries in southeastern Europe have always considered Greece a backward comrade as well – just as messed up as anyone else. But for some reason, the rest of the world began viewing Greece as if it were some sort of modern, first-world nation rather than part of the Eastern European bloc.
In many ways, this is true for Italy as well. Just recently, no one in Europe thought that Italy was an economic powerhouse that could take on vast amounts of debt. Europeans commonly thought of Italy as a chronically dysfunctional country with rarely industrious people and bad inflation. Of course, Italy was still a decent place to live, but it was certainly no Germany nor even France. If Italy had any redeeming qualities, it was its tourism, leather products, coffee, cars, and suits, but that was about it. Yet over the last few years, the country revamped its image as a key member of the Eurozone.
Beyond Italy and Greece, there are other countries that fit the same pattern. Think about Ireland and Argentina. The case for Ireland doesn't even require a European background to comprehend. Every American knows that Ireland has been seriously messed up since almost the beginning of time, and guess what….it's messed up again. Argentina had massive inflation only a decade ago. Everyone thought that surely the country had learned its lesson, but today estimates of Argentina's inflation reach as high as 30%.
Sometimes financial markets are just too forgiving. They assume that these countries have finally learned their lessons. The same has been true of lending to the former Soviet bloc. Many new nations have gained sizeable debt burdens in only two short decades. It's easy to see how investors are lured into these deals. Until there's trouble, emerging economies always sound enticing. And after all, can one really stereotype a country? Why should the government or inflation of decades ago scare the investors of today? Yet, somehow the past keeps repeating itself in these places, and investors keep falling for the allure of a transformed, emerging economy.
Up next, we have an article by Andy Miller on the top risk exposures in the real-estate market going forward. Andy Miller, cofounder of Miller Frishman Group, is a regular contributor on the topic of real estate to The Casey Report and a very popular faculty member at the Casey Summit series. For decades Andy has been involved in all aspects of the US real estate industry, including building, managing, and financing large inventories of commercial real estate, and providing workout services on troubled real estate for major financial institutions across the country. Andy was one of the few real-estate professionals to sell the bulk of his holdings in anticipation of the end of the housing bubble. In other words, when he talks, we listen. Here's his latest, quick update.
By Andy Miller
The real estate market is very interesting. For the most part, it seems everyone has the giggles. However, there are major exposures lurking. Here are the top exposures I'm keeping an eye on:
That's it from the trenches. We continue to fix our bayonets and run into battle.
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Pimco CEO: US Risks a Lost Decade (Real Clear Markets)
El-Erian from Pimco lays out the case for a Japanese-style lost decade in the US. This is a really great interview because it's very even-handed. He explains how our problems resemble Japan's, how things could be even worse here, and what advantages the US possesses over Japan. Usually interviews just want a couple of sound bites, but El-Erian covers nearly all the bases intelligently and succinctly.
The Paulson Rumors Are True (Zero Hedge)
John Paulson – one of the stars who bet against the subprime crash – is quickly losing his shine. Not only has his fund struggled as of late, but it appears that he's doubling down on some of his bad bets while letting the winners go… never a good sign. From Q2 to Q3, he trimmed down his shares of GLD by over a third, from 31.5 million to 20.2 million. On top of that, he has added to his Capital One and Bank of America positions.
As I've noted before, Paulson has a too simplistic view of the business cycle. He didn't really understand what was coming in 2008 and thus only got half the story right. Paulson saw a regular business cycle with a market crash followed by the usual rapid recovery. That's not what happened. This was a crash followed by a prolonged slump and as a result, his fund has been hurt by leveraged plays expecting a recovery at any moment. Nonetheless, being half right is still better than almost everyone else who was 100% wrong.
Why Americans Won't Do Dirty Jobs (Bloomberg Businessweek)
This is a well-written story; however, it doesn't come with a whole lot of statistics. Alabama recently passed one of the nation's toughest immigration laws which would force schools to ascertain the immigration status of students and their parents. As a result, illegal immigrants are leaving Alabama in droves. The unintended consequence – as this story points out – is an extreme shortage of workers for the dirty jobs many immigrants performed beforehand. Even with the recession, it appears that many locals refuse to do the work. Instead of opening more jobs for Americans, it appears that the state's new law may just discourage other businesses from locating in Alabama.
That's it for today. Thank you for reading and subscribing to Casey Daily Dispatch.
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